In today’s evolving regulatory environment – and at a time when technological advancements are changing the face of financial services on an unprecedented scale – banks can regain their competitive edge quickly and cost-effectively by partnering with forward-thinking financial technology innovators.

The processes that underpin the workings of the global financial services industry are currently undergoing a period of significant change, the scale of which has arguably not been seen since the introduction of electronic trading over twenty years ago.

The digital transformation that has spawned from the emergence of technological developments such as predictive analytics, blockchain and artificial intelligence is the single most significant factor currently shaping the evolution of the banking industry.

Meanwhile, banks are facing an unprecedented array of outside pressures when seeking to grow their businesses, as major regulatory reforms and changes to approaches to risk and internal operating models have transformed the very fabric of the banking industry since the financial crisis of 2008.

This environment has enabled fintech firms to gain significant market share in a number of areas where banks once dominated. Global investment in fintech ventures more than tripled from 2011 to 2014[1] (figure 1) and the sector continues to grow. Investment in fintech is expected to accelerate to more than $150 billion over the next five years, with more than $50 billion already invested in roughly 2,500 technology companies.

Figure 1: Global fintech investment

As Celent points out in a recent report, “Fintechs increasingly have the flexibility, customer proximity, and technology understanding necessary to address business challenges across the entire value chain of capital markets” and solve problems with “greater automation, effectiveness, or better leveraging of data.”[2]

Forward-thinking banks are now partnering with start-up fintech brands to enable them to become more innovative, efficient, timely and profitable.

Connectivity and cost

The demand for pioneering technology in the interdealer financial markets is breathtaking. As banks embrace digital technologies, their appetite for innovation is growing as they strive to automate processes and ensure their competitive strength in a rapidly transforming financial marketplace.

However, with budgets and margins under real pressure even at top tier investment banks, cost has become a crucial factor in any decision related to technology – and as these institutions are constantly looking for ways to eliminate risk from business operations, the unpredictable cost and resource demands of in-house technology projects have contributed to an increase in the levels of outsourcing. Moreover, the tolerance for risky innovation is eroded by short-term ROI demands and aggressive growth goals, which are further undermined by major declines in FICC headcount (figure 2).

Figure 2: FICC headcount

Technology consultancy Gartner agrees, stating: “build activities within organisations should be focused on quick and inexpensive ‘hits’, as well as projects that just cannot be purchased at any price.”[3] In a fast paced environment in which technological advancements are continuous, in-house systems are at risk of becoming obsolete even before completion. Conversely, nimble and specialised fintech startups have the agility to keep pace and remain at the cutting edge of innovation in their chosen field.

By opting to partner with specialist fintech vendors, banks benefit from visible and predictable costs as well as rapid deployment – the art of integration is a complex skill that technology vendors are able to fine tune through working with a diverse spectrum of customers. This enables tier 2 and 3 banks to quickly enter new markets and increase profitability.

The additional cost of maintaining and enhancing proprietary technology is another reason why banks are continuing to favour partnering with fintech providers that have already incurred the cost and resources of building technology and are best able to efficiently support and enhance it. By opting to outsource trading technology and paying attention to their core business, banks are able to quickly deploy cutting edge systems and cut their time to market by years.

The emergence of Analytics 3.0

The explosion of financial services data in recent years has placed data analytics at the forefront of the technological revolution. Fintech innovators are finding ways to harness this data and derive intelligence like never before – and as a result the demand for ‘Analytics 3.0’ from banks seeking to regain their competitive edge is booming – particularly in the challenging FICC markets.

In a recent Harvard Business School article[4], leading academic and analytics guru Thomas Davenport argued that we are now entering the era of Analytics 3.0, where its predecessors were Business Intelligence (1.0) and Big Data (2.0).

This new environment is about data enriched offerings achieved through “applying powerful data-gathering and analysis methods not just to a company’s operations but also to its offerings—to embed data smartness into the products and services customers buy.”

“We expect dealers to use information to drive much sharper choices around service levels for individual clients.”

 Oliver Wyman, 13 March 2016

Celent agrees, stating in a recent report: “Never before has creating information, and insight from data been more important. The banks that survive and win in the changing FICC world will leverage their access to detailed insights into their clients and relationship with their clients. These data insights must come from a detailed perspective of customer engagement, liquidity venues and market protocols. These banks will know their exact regulatory and capital costs, and a full perspective on the economics of each trade.”[5]

Oliver Wyman[6] goes further and adds: “The role of sales teams will shift over the next five years as banks develop smarter approaches to leveraging the wealth of data available to them. Automated data feeds will allow for increased loading of the salesforce, smarter allocation of resources and targeted trade ideas. Against a backdrop of increasingly automated execution through electronic platforms, this should lead to fundamental changes in sales strategy and costs.”

It adds: “More reliable information flows within banks, as well as robust analytical techniques, are needed to unlock the value of client information. Once this is accomplished, banks can assess client level economics and buying behaviour in order to allocate resources more effectively. There is significant scope for upside here: when we look across individual clients and sub-segments, we see stark differences in the relative attractiveness across sub-groups of clients. Importantly, this is not necessarily the same for all banks, as it depends on each bank’s areas of strength and financial constraints. For example, specialist funds typically require relatively high sales/coverage costs and more risk capital, but tend to have less need for leverage-intensive product structures.”

The role of data analytics has evolved significantly to meet this need, moving from the field of Big Data to innovative products that give banks an enterprise-wide view of data and enable them to derive meaning from it. Those financial institutions that provide employees with granular and precise short cuts to informed market decision-making and action will be the long run winners.

This new generation of data analytics technology is in the early stages of deployment across the industry, but is already set to transform financial markets and could act as a key differentiator in performance. Access to this type of business intelligence enables FICC businesses to respond proactively and in the best interests of their clients, rather than being reactive.

Banks now need to move beyond descriptive analytics and into the field of prioritised action and predictive analytics based on historical patterns. Research from Harvard recently indicated that by 2017, firms using predicative analytics will be 20% more profitable than those without. Predictive analytics enable institutions to leverage the underlying patterns to direct front-line employees into targeted opportunity. For a FICC business, this could provide answers to previously unanswerable questions such as: which clients am I anticipating seeing in the market today? What products do I think clients will most likely be trading?

A collaborative approach

There is a new level of maturity and common understanding between banks and financial technology vendors in the wake of the financial crisis and emerging regulatory reforms – and nowhere more so than in the field of data analytics for sell-side FICC teams.

Decisions around IT sourcing are now based on a greater understanding of the benefits of the outsourcing model and the high levels of cost and risk involved in undertaking large scale in-house technology build projects.

In today’s environment banks must do everything in their power to ensure they retain a competitive edge and maximise revenues and P&L in the market segments they choose to operate in – and the quickest route to success is partnering with innovative fintech vendors to implement best-in-class solutions quickly and efficiently.

A key challenge is determining where to focus resources – the risk of not amply investing, or over investing in nascent ideas is always there – but it is clear that data analytics is an area whose importance banks cannot afford to underestimate or in the case of smaller participants, miss the opportunity to catch-up with and level the playing field with the traditionally dominant players. It is crucial that banks place their data assets front and centre of their decision making process in order to remain relevant in this increasingly competitive market place.

[1] Economist 2014

[2] Celent 2016

[3] Gartner 2015


[5] Celent 2015

[6] Oliver Wyman, 2016

By Matthew Hodgson,

CEO & Founder, Mosaic Smart Data